Regulators question Goldman, JPMorgan's capital plans

Goldman Sachs and JPMorgan Chase, the Wall Street giants that emerged from the financial crisis in a position of strength, are now facing questions about their ability to withstand future market shocks.

The Fed’s rebuke to Goldman and JPMorgan highlights the growing tension as regulators try make sure that banks are better prepared for the next market shock. With profits improving, financial institutions want to enrich investors by increasing their dividends and buying back shares. But regulators want banks to be cautious with their capital, in case they face future losses.

Regulators are trying to prevent a repeat of the financial crisis that began in 2008, when the banking industry brought the financial system to the brink and many institutions had to be bailed out by taxpayers. To guard against future problems, Congress mandated that regulators annually test the financial strength of large banks. As part of that effort, regulators can now stop banks from paying out capital, which lenders could previously do with little oversight.

Last week, the Fed released the results of this year’s so-called stress tests, which assess the ability of the banks to withstand severe financial and economic shocks. The test showed that banks have substantially increased their capital levels since the financial crisis, although JPMorgan and Goldman Sachs lagged many of their peers under various situations.

Still, analysts expected both banks to gain outright approval for their plans to distribute capital to shareholders through dividend payments and stock buy backs. Both firms have shown an ability to generate solid profits since the crisis, though JPMorgan stumbled badly last year when it suffered big trading losses.

While the Fed has allowed to JPMorgan and Goldman to move forward with their capital plans, the regulators said the proposals “exhibited weaknesses" that were “significant enough to require immediate attention." The banks will now have to address the shortcomings and resubmit them by the end of September. If they aren’t fixed by then, the Fed may block their capital plans.

Currently, JPMorgan plans to increase its dividend to 38 cents a share in the second quarter of 2013, up from the expected dividend of 30 cents in the first quarter. The board also outlined plans to repurchase as much as $6 billion of stock through early 2014.